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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ended February 28, 2006
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________ to ________
Commission File Number: 0-8656
TSR, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 13-2635899
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
400 Oser Avenue, Hauppauge, NY 11788
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(Address of principal executive offices)
631-231-0333
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(Registrant's telephone number)
None
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark whether the Registrant is large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
[ ] Yes [X] No
SHARES OUTSTANDING
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4,568,012 shares of common stock, par value $.01 per share, as of March 31, 2006
Page 1
TSR, INC. AND SUBSIDIARIES
INDEX
Page
Number
Part I. Financial Information:
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets -
February 28, 2006 and May 31, 2005....................... 3
Condensed Consolidated Statements of Income -
For the three months and nine months ended
February 28, 2006 and 2005............................... 4
Condensed Consolidated Statements of Cash Flows -
For the nine months ended February 28, 2006 and 2005..... 5
Notes to Condensed Consolidated Financial Statements.......... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 10
Item 3. Quantitative and Qualitative Disclosure About Market Risk..... 16
Item 4. Controls and Procedures....................................... 17
Part II. Other Information................................................ 17
Item 6. Exhibits................................................ 17
Signatures................................................................. 17
Page 2
Part I. Financial Information
Item 1. Financial Statements
TSR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS February 28, May 31,
2006 2005
----------- -----------
(Unaudited)
Current Assets:
Cash and cash equivalents (Note 3) ......................... $ 2,390,019 $ 2,571,276
Marketable securities (Note 5) ............................. 5,898,772 7,908,138
Accounts receivable (net of allowance for
doubtful accounts of $355,000 and 430,000) ............ 8,097,774 7,509,188
Other receivables .......................................... 78,574 69,511
Prepaid expenses ........................................... 36,435 46,280
Prepaid and recoverable income taxes ....................... 84,656 15,403
Deferred income taxes ...................................... 150,000 180,000
----------- -----------
Total current assets .................................. 16,736,230 18,299,796
Marketable securities (Note 5) .................................. 992,831 --
----------- -----------
Equipment and leasehold improvements, at cost (net of accumulated
depreciation and amortization of $540,242 and $524,142) .... 32,776 33,093
Other assets .................................................... 49,653 49,893
Deferred income taxes ........................................... 109,000 148,000
----------- -----------
$17,920,490 $18,530,782
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts and other payables ................................ $ 186,069 $ 216,031
Accrued expenses and other current liabilities ............. 1,581,639 2,015,995
Advances from customers .................................... 1,539,101 1,523,549
Income taxes payable ....................................... 164,242 152,966
----------- -----------
Total current liabilities ............................. 3,471,051 3,908,541
----------- -----------
Minority Interest ............................................... 29,385 33,458
----------- -----------
Stockholders' Equity:
Preferred stock, $1 par value, authorized
1,000,000 shares; none issued ......................... -- --
Common stock, $.01 par value, authorized
25,000,000 shares; issued 6,228,326 shares ............ 62,283 62,283
Additional paid-in capital ................................. 5,071,727 5,071,727
Retained earnings .......................................... 21,317,345 21,486,074
----------- -----------
26,451,355 26,620,084
Less: Treasury stock, 1,660,314 shares, at cost ............ 12,031,301 12,031,301
----------- -----------
14,420,054 14,588,783
----------- -----------
$17,920,490 $18,530,782
=========== ===========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
Page 3
TSR, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
FOR THE THREE AND NINE MONTHS ENDED FEBRUARY 28, 2006 AND 2005
(UNAUDITED)
Three Months Ended Nine Months Ended
February 28, February 28, February 28, February 28,
2006 2005 2006 2005
------------ ------------ ------------ ------------
Revenues, net ............................................... $ 11,594,872 $ 12,432,714 $ 35,888,975 $ 38,951,953
Cost of sales ............................................... 9,486,969 9,841,597 28,886,196 30,526,592
Selling, general and administrative expenses ................ 1,683,686 1,856,245 5,025,334 5,629,414
------------ ------------ ------------ ------------
11,170,655 11,697,842 33,911,530 36,156,006
------------ ------------ ------------ ------------
Income from operations ...................................... 424,217 734,872 1,977,445 2,795,947
Other income (expense):
Interest and dividend income ........................... 93,644 49,076 255,243 110,555
Realized and unrealized gain (loss) from marketable
securities, net ...................................... (4,864) 704 (5,088) (3,124)
Minority interest in subsidiary operating profits ...... (9,377) (13,367) (57,245) (49,148)
------------ ------------ ------------ ------------
Income before income taxes .................................. 503,620 771,285 2,170,355 2,854,230
Provision for income taxes .................................. 214,000 319,000 923,000 1,228,000
------------ ------------ ------------ ------------
Net income ................................................ $ 289,620 $ 452,285 $ 1,247,355 $ 1,626,230
============ ============ ============ ============
Basic and diluted net income per common share ............... $ 0.06 $ 0.10 $ 0.27 $ 0.36
============ ============ ============ ============
Weighted average number of basic common shares
outstanding ................................................. 4,568,012 4,568,012 4,568,012 4,568,012
============ ============ ============ ============
Weighted average number of diluted common
shares outstanding ..................................... 4,568,012 4,571,019 4,568,012 4,570,112
============ ============ ============ ============
The accompanying notes are an integral part of these
consolidated condensed financial statements.
Page 4
TSR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED FEBRUARY 28, 2006 AND 2005
(UNAUDITED)
Nine Months Ended
February 28,
2006 2005
------------ ------------
Cash flows from operating activities:
Net income ........................................................... $ 1,247,355 $ 1,626,230
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ..................................... 16,100 26,721
Realized and unrealized loss from marketable securities, net ....... 5,088 3,124
Stock based compensation expense .................................. -- 11,600
Minority interest in subsidiary operating profit ................. 57,245 49,148
Deferred income taxes ............................................. 69,000 (5,000)
Recovery of bad debt expense ....................................... (75,000) --
Changes in assets and liabilities:
Accounts receivable - trade ..................................... (513,586) 2,195,631
Other receivables ............................................... (9,063) (7,760)
Prepaid expenses ................................................. 9,845 1,795
Prepaid and recoverable income taxes ............................ (69,253) 1,688
Other assets .................................................... 240 35,000
Accounts payable and accrued expenses ............................ (464,318) (231,741)
Income taxes payable ............................................. 11,276 35,282
Advances from customers ......................................... 15,552 (22,007)
------------ ------------
Net cash provided by operating activities ........................... 300,481 3,719,711
------------ ------------
Cash flows from investing activities:
Proceeds from maturities and sales of marketable securities ........ 10,342,372 9,450,593
Purchases of marketable securities ................................. (9,330,925) (8,903,021)
Purchases of fixed assets ......................................... (15,783) (17,880)
------------ ------------
Net cash provided by investing activities ............................. 995,664 529,692
------------ ------------
Cash flows from financing activities:
Distribution to minority interest .................................. (61,318) (77,175)
Cash dividends paid ............................................... (1,416,084) (2,055,605)
------------ ------------
Net cash used in financing activities ................................. (1,477,402) (2,132,780)
------------ ------------
Net increase (decrease) in cash and cash equivalents ....................... (181,257) 2,116,623
Cash and cash equivalents at beginning of period ........................... 2,571,276 2,268,796
------------ ------------
Cash and cash equivalents at end of period ................................. $ 2,390,019 $ 4,385,419
============ ============
Supplemental Disclosures:
Income tax payments ................................................. $ 912,000 $ 1,196,000
============ ============
The accompanying notes are an integral part of these
consolidated condensed financial statements.
Page 5
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2006
(UNAUDITED)
1. Basis of Presentation
The accompanying condensed consolidated interim financial statements
include the accounts of TSR, Inc. and its subsidiaries (the "Company"). All
significant inter-company balances and transactions have been eliminated in
consolidation. These interim financial statements have been prepared in
accordance with accounting principles generally accepted in the United
States of America applying to interim financial information and with the
instructions to Form 10-Q of Regulation S-X of the Securities and Exchange
Commission. Accordingly, certain information and footnote disclosures
required by accounting principles generally accepted in the United States
of America and normally included in the Company's annual financial
statements have been condensed or omitted. These interim financial
statements as of and for the nine months ended February 28, 2006, are
unaudited; however, in the opinion of management, such statements include
all adjustments (consisting of normal recurring accruals) necessary to
present fairly the consolidated financial position, results of operations,
and cash flows of the Company for the periods presented. The results of
operations for the interim periods presented are not necessarily indicative
of the results that might be expected for future interim periods or for the
full year ending May 31, 2006. These interim financial statements should be
read in conjunction with the Company's consolidated financial statements
and notes thereto included in the Company's Annual Report on Form 10-K for
the year ended May 31, 2005.
2. Net Income Per Common Share
Basic net income per common share is computed by dividing income available
to common stockholders (which for the Company equals its net income) by the
weighted average number of common shares outstanding, and diluted net
income per common share adds the dilutive effect of stock options and other
common stock equivalents. No options covering shares of common stock have
been omitted from the calculations of diluted net income per common share
for the three and nine month periods ended February 28, 2006 and 2005,
respectively, because their effect would have been antidilutive.
3 Cash and Cash Equivalents
The Company considers short-term highly liquid investments with maturities
of three months or less at the time of purchase to be cash equivalents.
Cash and cash equivalents were comprised of the following as of February
28, 2006:
Cash in banks................ $ 107,633
Money Market Funds........... 2,282,386
-----------
$ 2,390,019
===========
4. Revenue Recognition
The Company's contract computer programming services are generally provided
under time and materials agreements with customers. Accordingly, the
Company recognizes such revenues as services are provided. Advances from
customers represent amounts received from customers prior to the Company's
provision of the related services and credit balances from overpayments.
Reimbursements received by the Company for out-of-pocket expenses are
characterized as revenue in accordance with Emerging Issues Task Force
(EITF) Issue 01-14 "Income Statement of Characterization of Reimbursements
Received for `Out-of-Pocket' Expenses Incurred."
Page 6
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
FEBRUARY 28, 2006
(UNAUDITED)
5. Marketable Securities
The Company accounts for its marketable securities in accordance with
Statement of Financial Accounting Standards No. 115 "Accounting for Certain
Investments in Debt and Equity Securities." Accordingly, the Company
classifies its marketable securities at acquisition as either (i)
held-to-maturity, (ii) trading, or (iii) available-for-sale. Based upon the
Company's intent and ability to hold its US Treasury securities to maturity
(which maturities are mostly less than one year), such securities have been
classified as held-to -maturity and are carried at amortized cost. The
Company's equity securities are classified as trading securities, which are
carried at fair value with unrealized gains and losses included in
earnings. The Company's marketable securities are summarized as follows:
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Recorded
Current Cost Gains Losses Value
- ------- ---- ----- ------ -----
United States Treasury Securities .. $ 5,882,292 -- -- $ 5,882,292
Equity Securities .................. 16,866 -- (386) 16,480
----------- ----------- ----------- -----------
$ 5,899,158 $ -- $ (386) $ 5,898,772
=========== =========== =========== ===========
Long - Term
United States Treasury Securities .. $ 992,831 $ -- $ -- $ 992,831
=========== =========== =========== ===========
Page 7
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
FEBRUARY 28, 2006
(UNAUDITED)
6. Stock Options
On July 28, 2003 the Company paid a large nonrecurring cash dividend of
$2.00 per share to shareholders of record as of July 11, 2003. The dividend
paid amounted to $9,088,024. Guidance under Emerging Issues Task Force
(EITF) 00-23, ISSUES RELATED TO THE ACCOUNTING FOR STOCK COMPENSATION UNDER
APB OPINION NO.25 AND FASB INTERPRETATION NO.44, requires modification for
outstanding stock options by adjusting the price and/or the number of
shares under a fixed stock option award as a result of a large nonrecurring
cash dividend. The Company did not adjust the terms of any outstanding
stock options and, given the circumstances, a new measurement date and
variable accounting treatment was required for its outstanding options at
the dividend payment date. The Company had 10,000 such outstanding options,
all of which were vested, as of February 28, 2005 which were subject to
variable accounting treatment. Accordingly, the Company recorded a non-cash
compensation charge of $8,700 for the three months ended February 28, 2005
and $11,600 for the nine months ended February 28, 2005. These options
expired in June 2005.
The Company has one stock-based employee compensation plan in effect. The
Company accounts for all transactions under which employees receive shares
of stock or other equity instruments in the Company based on the price of
its stock in accordance with the provisions of Accounting Principles Board
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. All options
granted under the plan had an exercise price equal to the market value of
the underlying common stock, and the number of shares represented by such
options were known and fixed, on the date of grant. However, as a result of
the large nonrecurring cash dividend, the remaining outstanding 10,000
options were treated as variable options until their expiration in June
2005. The following table illustrates the effect on net income and earnings
per share if the Company had applied the fair value recognition provisions
of Statement of Financial Accounting Standards (SFAS) No. 123 ACCOUNTING
FOR STOCK-BASED COMPENSATION.
Three Months Ended Nine Months Ended
February 28, February 28,
2006 2005 2006 2005
---------- ---------- ---------- ----------
Net income:
As reported............... $ 289,620 $ 452,285 $1,247,355 $1,626,230
Add: Stock based employee
compensation expense
included in reported net
income, net of related
tax effect.................. -- 8,700 -- 11,600
---------- ---------- ---------- ----------
Proforma net income....... $ 289,620 $ 460,985 $1,247,355 $1,637,830
========== ========== ========== ==========
Basic net income per share:
As reported................. $ 0.06 $ 0.10 $ 0.27 $ 0.36
========== ========== ========== ==========
Proforma.................... $ 0.06 $ 0.10 $ 0.27 $ 0.36
========== ========== ========== ==========
There were no options granted in fiscal 2006 and 2005.
Page 8
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
FEBRUARY 28, 2006
(UNAUDITED)
7. Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123(R), "Statement of Financial
Accounting Standards No. 123 (revised 2004)," which requires that the cost
resulting from all share based payment transactions be recognized in the
financial statements. This Statement establishes fair value as the
measurement objective in accounting for share based payment arrangements
and requires all entities to apply a fair value based measurement method in
accounting for share based transactions with employees except for equity
instruments held by employee share ownership plans. This Statement is
effective as of the beginning of the first annual reporting period that
begins after June 15, 2005. The Company does expect the adoption of the
revised SFAS No. 123(R) to have a material impact on its consolidated
financial statements.
8. Major Customer
The Company received a notice on March 27, 2006 from the New York State
Office of General Services, Procurement Services Group (OGS) suspending
until further notice its contract with OGS. All future placements with the
New York City Department of Education (DOE), including renewals of existing
placements, are under this OGS contract. The DOE accounts for approximately
10% of the Company's revenues. The Company currently has forty-two
consultants placed with the DOE. The suspension will not effect existing
consultants already placed with the DOE, but would affect new placements
and renewals, unless the suspension is lifted. Twenty-five consultants
placed with the DOE are coming up for renewal in the next four months.
The notice stated that the suspension was due to the report of an
investigation by the Office of the Special Commissioner of Investigation
("SCI") of the DOE. Prior to receipt of the OGS notice, the DOE sent a
notice to the Company, with a copy of this report, requesting that it
respond to the findings in the report. The investigative report concluded
that the Company operated improperly from 2001 through the spring of 2003
by using a subcontracting arrangement to obtain programmers for positions
with the DOE. The subcontracting was with a small firm that was owned by an
individual that worked as a consultant under contract at the DOE in a
supervising capacity and sometimes was involved in decisions to select
consultants that financially benefited both him and the Company. The
investigative report also suggests that the Company received advanced
information as to new positions from this individual and that the
subcontracting increased the costs to the DOE since two firms, instead of
one, profited from this arrangement.
The Company's response to the DOE stated that the Company violated the
subcontracting prohibition because of its mistaken belief that since some
of its competitors were using subcontractors, that the contractual
provision was being ignored in order to get the best candidates in a timely
manner. Subcontracting is an acceptable method for obtaining temporary
programming help with many of the Company's customers. The Company stated
in its response that it subcontracted with this firm because it had
provided qualified candidates and the Company's recruiters weren't finding
good candidates in a timely fashion, mainly because the required skill set
was relatively new to the industry. The Company does not believe that its
subcontracting resulted in overcharging the DOE.
The Company has provided responses to the DOE with respect to the findings
in the report and to some follow-up questions received from the DOE. The
DOE has not yet taken any action with respect to the Company's agreements
with DOE. The Company has met with the OGS and has a meeting scheduled with
the DOE in an effort to resolve this matter.
The Company intends to continue to pursue discussions with DOE and OGS in
an attempt to resolve this matter and have the suspension lifted. The
Company cannot predict whether the DOE or OGS will assert a claim against
the Company, the extent to which the Company may be required to make
payments to DOE to resolve the issues raised or the impact of this matter
on the Company's continued relationship with the DOE and OGS or the
Company's future revenues.
Page 9
PART I. FINANCIAL INFORMATION
ITEM 2.
TSR, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
condensed consolidated financial statements and the notes to such financial
statements.
Forward-Looking Statements
Certain statements contained in Management's Discussion and Analysis of
Financial Condition and Results of Operations, including statements concerning
the Company's future prospects and the Company's future cash flow requirements
are forward looking statements, as defined in the Private Securities Litigation
Reform Act of 1995. Actual results may differ materially from those projections
in the forward looking statements which statements involve risks and
uncertainties, including but not limited to the following: risks relating to the
competitive nature of the markets for contract computer programming services;
the extent to which market conditions for the Company's contract computer
consulting services will continue to adversely affect the Company's business;
the concentration of the Company's business with certain customers; uncertainty
as to the Company's ability to maintain its relations with existing customers
and expand its contract computer consulting services business; the impact of
changes in the industry, such as the use of vendor management companies in
connection with the consulting procurement process, the increase in customers
moving IT operations offshore and the impact of the change in pricing
methodology of the Company's largest customer and other risks and uncertainties
set forth in the Company's filings with the Securities and Exchange Commission.
Results of Operations
The following table sets forth for the periods indicated certain financial
information derived from the Company's condensed consolidated statements of
earnings. There can be no assurance that trends in operating results will
continue in the future:
Three months ended February 28, 2006 compared with three months ended February
28, 2005
(Dollar amounts in Thousands)
Three Months Ended
February 28,
2006 2005
---- ----
% of % of
Amount Revenues Amount Revenues
------ -------- ------ --------
Revenues ........................ $ 11,595 100.0 $ 12,433 100.0
Cost of sales ................... 9,487 81.8 9,842 79.2
-------- ----- -------- -----
Gross profit .................... 2,108 18.2 2,591 20.8
Selling, general, and
administrative expenses ........ 1,684 14.5 1,856 14.9
-------- ----- -------- -----
Income from operations .......... 424 3.7 735 5.9
Other income .................... 80 0.6 36 0.3
-------- ----- -------- ------
Income before income taxes ...... 504 4.3 771 6.2
Provision for income taxes ...... 214 1.8 319 2.6
-------- ----- -------- -----
Net income ...................... $ 290 2.5 $ 452 3.6
======== ===== ======== =====
Page 10
TSR, INC. AND SUBSIDIARIES
Revenues
Revenues consist primarily of revenues from computer programming consulting
services. Revenues for the quarter ended February 28, 2006 decreased $838,000 or
6.7% from the comparable prior year period. The decline in revenues resulted
primarily from a decrease in the average number of consultants on billing with
clients from 373 for the quarter ended February 28, 2005 to 342 for the quarter
ended February 28, 2006. Additionally, revenues decreased as a result of the
impact of a full quarter of the previously announced price reduction by the
Company's largest customer and additional mandatory discount programs at other
large customers. Although there has been some improvement in market conditions
compared to the past few years, revenues have not improved since the Company has
not yet fully adapted its business model to more effectively deal with changing
market factors such as vendor management and off-shore IT operations.
The Company received a notice on March 27, 2006 from the New York State Office
of General Services, Procurement Services Group (OGS) suspending until further
notice its contract with OGS. All future placements with the New York City
Department of Education (DOE), including renewals of existing placements, are
under this OGS contract. The DOE accounts for approximately 10% of the Company's
revenues. The Company currently has forty-two consultants placed with the DOE.
The suspension will not effect existing consultants already placed with the DOE,
but would affect new placements and renewals, unless the suspension is lifted.
Twenty-five consultants placed with the DOE are coming up for renewal in the
next four months.
The notice stated that the suspension was due to the report of an investigation
by the Office of the Special Commissioner of Investigation ("SCI") of the DOE.
Prior to receipt of the OGS notice, the DOE sent a notice to the Company, with a
copy of this report, requesting that it respond to the findings in the report.
The investigative report concluded that the Company operated improperly from
2001 through the spring of 2003 by using a subcontracting arrangement to obtain
programmers for positions with the DOE. The subcontracting was with a small firm
that was owned by an individual that worked as a consultant under contract at
the DOE in a supervising capacity and sometimes was involved in decisions to
select consultants that financially benefited both him and the Company. The
investigative report also suggests that the Company received advanced
information as to new positions from this individual and that the subcontracting
increased the costs to the DOE since two firms, instead of one, profited from
this arrangement.
The Company's response to the DOE stated that the Company violated the
subcontracting prohibition because of its mistaken belief that since some of its
competitors were using subcontractors, that the contractual provision was being
ignored in order to get the best candidates in a timely manner. Subcontracting
is an acceptable method for obtaining temporary programming help with many of
the Company's customers. The Company stated in its response that it
subcontracted with this firm because it had provided qualified candidates and
the Company's recruiters weren't finding good candidates in a timely fashion,
mainly because the required skill set was relatively new to the industry. The
Company does not believe that its subcontracting resulted in overcharging the
DOE.
The Company has provided responses to the DOE with respect to the findings in
the report and to some follow-up questions received from the DOE. The DOE has
not yet taken any action with respect to the Company's agreements with DOE. The
Company has met with the OGS and has a meeting scheduled with the DOE in an
effort to resolve this matter.
The Company intends to continue to pursue discussions with DOE and OGS in an
attempt to resolve this matter and have the suspension lifted. The Company
cannot predict whether the DOE or OGS will assert a claim against the Company,
the extent to which the Company may be required to make payments to DOE to
resolve the issues raised or the impact of this matter on the Company's
continued relationship with the DOE and OGS or the Company's future revenues.
Page 11
Cost of Sales
Cost of sales for the quarter ended February 28, 2006, decreased $355,000 or
3.6% to $9,487,000 from $9,842,000 in the prior year period. This decrease is
primarily attributable to fewer consultants on billing with customers. Cost of
sales as a percentage of revenues increased from 79.2% in the quarter ended
February 28, 2005 to 81.8% in the quarter ended February 28, 2006. This increase
is primarily attributable to the decreased revenues resulting from the impact of
the previously announced price reduction by the Company's largest customer. This
change in pricing methodology, which provides for pricing on a "cost plus"
basis, reduced revenues while not allowing offsetting cost reductions.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of expenses
relating to account executives, technical recruiters, facilities costs,
management and corporate overhead. These expenses decreased $172,000 or 9.3%
from $1,856,000 in the quarter February 28, 2005 to $1,684,000 in the quarter
ended February 28, 2006. This decrease was primarily attributable to reduced
selling expenses resulting from a reduced number of account executives and the
termination of the "Transformer" service described below.
During the past year, the Company had been working on developing a new service,
"Transformer", aimed at converting legacy systems that run on large main-frame
computers to lower cost computer environments. The Company has terminated this
effort, although it may renew its efforts in the future.
Income from Operations
Income from operations decreased $311,000 or 42.3% from $735,000 in the quarter
ended February 28, 2005 to $424,000 in the quarter ended February 28, 2006. The
decrease in income from operations was primarily attributable to the impact of a
full quarter of the previously announced price reduction by the Company's
largest customer. This change in pricing methodology reduced revenues while not
allowing offsetting cost reductions, resulting in a greater percentage decline
in net income than in revenues.
Other Income
Other income resulted primarily from interest and dividend income, which
increased by $45,000 to $94,000 due to higher interest rates in the quarter
ended February 28, 2006. Additionally, the Company had a net unrealized loss of
$5,000 in the quarter ended February 28, 2006 versus a gain of $700 in the
quarter ended February 28, 2005 from marketable securities due to mark to market
adjustments of its trading securities equity portfolio.
Income Taxes
The effective income tax rate of 42.5% for the quarter ended February 28, 2006
increased from a rate of 41.4% in the quarter ended February 28, 2005.
Page 12
TSR, INC. AND SUBSIDIARIES
Nine months ended February 28, 2006 compared with nine months ended February 28,
2005
(Dollar amounts in Thousands)
Nine Months Ended
February 28,
2006 2005
---- ----
% of % of
Amount Revenues Amount Revenues
------ -------- ------ --------
Revenues ........................ $ 35,889 100.0 $ 38,952 100.0
Cost of sales ................... 28,886 80.5 30,527 78.4
-------- ----- -------- -----
Gross profit .................... 7,003 19.5 8,425 21.6
Selling, general, and
administrative expenses ........ 5,026 14.0 5,629 14.4
-------- ----- -------- -----
Income from operations .......... 1,977 5.5 2,796 7.2
Other income .................... 193 0.5 58 0.1
-------- ----- -------- -----
Income before income taxes ...... 2,170 6.0 2,854 7.3
Provision for income taxes ...... 923 2.5 1,228 3.1
-------- ----- -------- -----
Net income ...................... $ 1,247 3.5 $ 1,626 4.2
======== ===== ======== =====
Revenues
Revenues consist primarily of revenues from computer programming consulting
services. Revenues for the nine months ended February 28, 2006 decreased
$3,063,000 or 7.9% from the comparable prior year period. The decline in
revenues resulted primarily from a decrease in the average number of consultants
on billing with clients from 382 for the nine months ended February 28, 2005 to
345 for the nine months ended February 28, 2006. Additionally, revenues
decreased as a result of the impact of the previously announced price reduction
by the Company's largest customer and additional mandatory discount programs at
other large customers. Although there has been some improvement in market
conditions compared to the past few years, revenues have not improved since the
Company has not yet fully adapted its business model to more effectively deal
with changing market factors such as vendor management and off-shore IT
operations.
Cost of Sales
Cost of sales for the nine months ended February 28, 2006, decreased $1,641,000
or 5.4% to $28,886,000 from $30,527,000 in the prior year period. This decrease
is primarily attributable to fewer consultants on billing with customers. Cost
of sales as a percentage of revenues increased from 78.4% in the nine months
ended February 28, 2005 to 80.5% in the nine months ended February 28, 2006.
This increase is primarily attributable to the decreased revenues resulting from
the impact of the previously announced price reduction by the Company's largest
customer. This change in pricing methodology, which provides for pricing on a
"cost plus" basis, reduced revenues while not allowing offsetting cost
reductions.
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TSR, INC. AND SUBSIDIARIES
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of expenses
relating to account executives, technical recruiters, facilities costs,
management and corporate overhead. These expenses decreased $604,000 or 10.7%
from $5,629,000 in the nine months ended February 28, 2005 to $5,025,000 in the
nine months ended February 28, 2006. This decrease was primarily attributable to
reduced selling expenses from a reduced number of account executives and the
termination of the "Transformer" services described below.
During the past year, the Company had been working on developing a new service,
"Transformer", aimed at converting legacy systems that run on large main-frame
computers to lower cost computer environments. The Company has terminated this
effort, although it may renew its efforts in the future.
Income from Operations
Income from operations decreased $819,000 or 29.3% from $2,796,000 in the nine
months ended February 28, 2005 to $1,977,000 in the nine months ended February
28, 2006. The decrease in income from operations was primarily attributable to
the impact of a full period of the previously announced price reduction by the
Company's largest customer. This change in pricing methodology reduced revenues
while not allowing offsetting cost reductions, resulting in a greater percentage
decline in net income than in revenues.
Other Income
Other income resulted primarily from interest and dividend income, which
increased by $145,000 to $255,000 due to higher interest rates in the period
ended February 28, 2006. The Company had a net unrealized loss of $5,000 in the
nine months ended February 28, 2006 from marketable securities due to mark to
market adjustments of its trading securities equity portfolio. The Company also
had a realized loss of $4,000 in the nine months ended February 28, 2005 from
the sale of marketable securities.
Income Taxes
The effective income tax rate of 42.5% for the nine months ended February 28,
2006 decreased from a rate of 43.0% in the nine months ended February 28, 2005.
Page 14
TSR, INC. AND SUBSIDIARIES
Liquidity and Capital Resources
The Company expects that cash flow generated from operations together with its
cash and marketable securities will be sufficient to provide the Company with
adequate resources to meet its liquidity requirements for the foreseeable
future.
At February 28, 2006 the Company had working capital of $13,265,000 and cash and
cash equivalents of $2,390,000 as compared to working capital of $14,391,000 and
cash and cash equivalents of $2,571,000 at May 31, 2005. The Company's working
capital also included $5,899,000 and $7,908,000 of marketable securities at
February 28, 2006 and May 31, 2005, respectively.
Net cash provided by operating activities for the nine months ended February 28,
2006, of $300,000 compared to cash provided of $3,720,000 for the nine months
ended February 28, 2005. The decrease in cash provided by operating activities
resulted primarily from the Company's net income being offset by an increase in
accounts receivable and a decrease in accrued expenses. The increase in accounts
receivable of $514,000 pertained primarily to delays at one major account, the
NYC Department of Education (DOE). The Company believes that this increase is
due to administrative delays in the processing of certain purchase orders for
the Company and other vendors and is unrelated to the notices received from the
DOE and the NYS Office of General Services as discussed under "Revenues" in the
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations" on page 11. The cash provided by operating activities for the nine
months ended February 28, 2005 resulted primarily from a decrease in accounts
receivable due to collection of amounts due from a major customer who had
delayed payments at May 31, 2004.
Net cash provided by investing activities of $996,000 and $530,000 for the nine
months ended February 28, 2006 and 2005 respectively primarily resulted from
allowing US Treasury securities to mature without reinvesting all of the
proceeds.
Net cash used in financing activities resulted primarily from the payment of a
cash dividend of $1,416,000 and distributions to the minority interest of
$61,000. The Board of Directors has reduced the quarterly cash dividend for
fiscal 2006 from $0.15 to $0.08 per share. This will reduce the cash outlay for
the dividend by $320,000 per quarter.
The Company's capital resource commitments at February 28, 2006 consisted of
lease obligations on its branch and corporate facilities. The Company intends to
finance these lease commitments from cash flow provided by operations, available
cash and short-term marketable securities.
The Company's cash and marketable securities were sufficient to enable it to
meet its cash requirements during the nine months ended February 28, 2006. The
Company had available a revolving line of credit of $5,000,000 with a major
money center bank through October 6, 2007. As of February 28, 2006, no amounts
were outstanding under this line of credit.
Tabular Disclosure of Contractual Obligations
---------------------------------------------
Payments Due By Period
- ------------------------------------------------------------------------------------------------------------
LESS THAN MORE THAN
Contractual Obligations TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS
----------------------- ----- ------ --------- --------- --------
Long-Term Debt............................. -- -- -- -- --
Capital Lease Obligations.................. -- -- -- -- --
Operating Leases........................... 845,000 312,000 401,000 132,000 --
Purchase Obligations....................... -- -- -- -- --
Employment Agreements...................... 1,239,000 628,000 423,000 188,000 --
Consulting Contract........................ 250,000 200,000 50,000 -- --
Other Long-Term Liabilities Reflected on
the Registrant's Balance Sheet under GAAP.. -- -- -- -- --
---------- ---------- --------- --------- --------
Total...................................... $2,334,000 $1,140,000 $ 874,000 $ 320,000 $ --
========== ========== ========= ========= ========
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TSR, INC. AND SUBSIDIARIES
Recent Account Pronouncements
In December 2004, the FASB issued SFAS No. 123(R), "Statement of Financial
Accounting Standards No. 123 (revised 2004)," which requires that the cost
resulting from all share based payment transactions be recognized in the
financial statements. This Statement establishes fair value as the measurement
objective in accounting for shared based payment arrangements and requires all
entities to apply a fair value based measurement method in accounting for share
based transactions with employees except for equity instruments held by employee
share ownership plans. This Statement is effective as of the beginning of the
first annual reporting period that begins after June 15, 2005. The Company does
not expect the adoption of the revised SFAS No. 123(R) to have a material impact
on its consolidated financial statements.
Critical Accounting Policies
The SEC defines "critical accounting policies" as those that require the
application of management's most difficult, subjective or complex judgments,
often as a result of the need to make estimates about the effect of matters that
are inherently uncertain and may change in subsequent periods.
The Company's significant accounting policies are described in Note 1 to the
Company's consolidated financial statements, contained in its May 31, 2005
Annual Report on Form 10-K, as filed with the SEC. The Company believes that the
following accounting policies require the application of management's most
difficult, subjective or complex judgments:
ESTIMATING ALLOWANCES FOR DOUBTFUL ACCOUNTS RECEIVABLE
We perform ongoing credit evaluations of our customers and adjust credit limits
based upon payment history and the customer's current credit worthiness, as
determined by our review of their current credit information. We continuously
monitor collections and payments from our customers and maintain a provision for
estimated credit losses based upon our historical experience and any specific
customer collection issues that we have identified. While such credit losses
have historically been within our expectations and the provisions established,
we cannot guarantee that we will continue to experience the same credit loss
rates that we have in the past. A significant change in the liquidity or
financial position of any of our significant customers could have a material
adverse effect on the collectibility of our accounts receivable and our future
operating results.
VALUATION OF DEFERRED TAX ASSETS
We regularly evaluate our ability to recover the reported amount of our deferred
income taxes considering several factors, including our estimate of the
likelihood of the Company generating sufficient taxable income in future years
during the period over which temporary differences reverse. Presently, the
Company believes that it is more likely than not that it will realize the
benefits of its deferred tax assets based primarily on the Company's history of
and projections for taxable income in the future. In the event that actual
results differ from our estimates or we adjust these estimates in future
periods, we may need to establish a valuation allowance against a portion or all
of our deferred tax assets, which could materially impact our financial position
or results of operations.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
The Company's earnings and cash flows are subject to fluctuations due to (i)
changes in interest rates primarily affecting its income from the investment of
available cash balances in money market funds and (ii) changes in market values
of its investments in trading equity securities. Under its current policies, the
Company does not use interest rate derivative instruments to manage exposure to
interest rate changes. The Company's present exposure to changes in the market
value of its investments in equity securities is not significant.
Page 16
Item 4. Controls and Procedures
DISCLOSURE CONTROLS AND PROCEDURES. The Company conducted an evaluation, under
the supervision and with the participation of the principal executive officer
and principal financial officer, of the Company's disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934 (the "Exchange Act")). Based on this evaluation, the principal executive
officer and principal financial officer concluded that, as of the end of the
period covered by this report, the Company's disclosure controls and procedures
are effective.
INTERNAL CONTROL OVER FINANCIAL REPORTING. There was no change in the Company's
internal control over financial reporting (as such term is defined in Rule
13a-15(f) under the Exchange Act) during the Company's most recently reported
completed fiscal quarter that has materially affected, or is reasonably likely
to materially affect, the Company's internal control over financial reporting.
Part II. Other Information
Item 6. Exhibits
(a). Exhibit 31.1 - Certification by J.F. Hughes pursuant to 18
U.S.C. Section 1350, as adopt pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Exhibit 31.2 - Certification by John G. Sharkey pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Exhibit 32.1 - Certification by J.F. Hughes pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Exhibit 32.2 - Certification by John G. Sharkey pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TSR Inc.
(Registrant)
Date: April 13, 2006 /s/ J.F. Hughes
------------------------------------
J.F. Hughes, Chairman and President
Date: April 13, 2006 /s/ John G. Sharkey
------------------------------------
John G. Sharkey, Vice President Finance
Page 17